In order to add a bit of context to this post, it will be
necessary to go back a decade or so. In the second-half of 2007, the
once-regional banking institution RBS
had announced an operating profit of just over £10 billion, impressing all
manner of onlookers. It had done this by setting out on an expansive mission to
acquire as many financial institutions as it could, perhaps best exemplified
with the October
2007 £49 billion takeover of Dutch banking giant ABN-Amro. However, this
approach was built upon a mountain of debt, and ultimately, the bank was forced
to accept the truly massive £45
billion bailout given to it by the British Government in late 2008. Yet,
there are a few key points to mention before we get to the point of bailout.
Just weeks before the ABN-Amro purchase, Northern Rock, Britain’s fifth-largest
mortgage provider, had
failed, resulting in a memorable ‘run’ on the bank which was a clear indicator
of the perilous position of British institutions in relation to impending
explosion of the U.S. housing bubble – yet Goodwin continued with the ABN-Amro
purchase regardless, and was paid
£4 million for doing so. Another key point worth mentioning, particularly
with regards to the upcoming case, is that in April 2008 – before it accepted
any bailout – the bank issued
a call to its shareholders to support a record-breaking £12 billion cash call
to strengthen its capital position in the wake of the burst global bubble.
Writing at the time in 2008, one business media article notes that only a month
before, Goodwin had assured shareholders that a cash call would not be necessary,
but then quickly conceded that the ‘world
had changed’ and the bank had to protect itself against some £5.9 billion
worth of writedowns as a result of the Crisis. However, hindsight tends to cast
aspersions on people’s judgements, and hindsight is key for the forthcoming
case.

The claimants – the group of 9000 shareholders, including
institutional investors, small shareholders and former employees – allege that
rather than simply requiring extra cash to shore up its defences, RBS chiefs
were actively plugging holes that were developing because of their
short-sighted and reckless approach. One key element of the claim is that RBS
had been warned, by none other than leading advisors Goldman Sachs and
Deloitte, that ‘some
figures in the prospectus for the RBS cash call were vulnerable to misinterpretation
[and that] investors might conclude RBS’s ability to withstand losses was
stronger than it actually was’. Unfortunately, for RBS, there is plenty of
smoke emanating from this cash call, which seems to all intents and purposes to
be illustrative of a massive fire underneath. Shortly after the cash call was
met, the bank was nationalised. Once nationalised, it became clear that the
bank was simply not as strong as its leaders had claimed, with the immediate
aftermath revealing the actual worth of the acquisitions undertaken by Goodwin
to be up to £20
billion less than previously thought. The case hinges on the ability of the
claimants to prove that this misinformation was intentional, or that Goodwin
should have at least known about the state of affairs before initiating the
cash call, and the crucial document is the prospectus
offered in 2008 – it is worth noting that this is a civil case, meaning that Goodwin will not be criminally tried for his actions; the claimants
compensation claim is £520 million plus interest (thought to take the claim
up to £800 million).

For Fred Goodwin, it will be one of the first times he has
been in the public limelight since apologising and leaving his role of CEO of
RBS, together with a reduced
pension package. Some have labelled Goodwin a megalomaniac,
whilst others suggest that he ‘wanted
to do the right thing but it didn’t work out’. Yet, for the British Taxpayer,
this case is likely to have ramifications far into the future, which is why the
bank have worked
tirelessly to keep this case from the courtroom – it is vital for the bank
that the details of 2008 are kept private and, as the taxpayer still owns over
70% of the bank, perhaps it is vital for their interests too. Yet, although it
would result in a massive loss and a tremor for the economy were RBS to suffer
more attacks and losses, as previously discussed
here in Financial Regulation Matters,
perhaps it is time that institutions like RBS are not allowed to hide behind
the fear-mongering that revealing their inner-workings may cause. Perhaps, what
this country, and arguably every other country needs is for the financial elite
to recognise that their actions will be
scrutinised, regardless of the negative effects that the scrutiny may
cause. If the case does materialise over the next few weeks, it is likely that
we will see damning details of a bank ran irresponsibly, negligently, and
ultimately fraudulently, all overshadowed by the understanding that the
taxpayer had to save it is anyway. It is hoped, if the case does materialise, that
the public pays attention to the details of the case and sees the financial
elite for what they are – in reality, the country will likely be more
interested in the results and aftermath of the General Election; if only more
people could see how closely related those two elements are.

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